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3 Things Nutanix Management Wants You to Know

Repeat purchases by customers, focus on high-margin software sales, and DRAM prices will be critical to the company.

Nutanix(NASDAQ:NTNX) confirmed that its turnaround is on track with a solid fourth-quarter report on Aug. 31. The cloud computing specialist delivered outstanding revenue growth thanks to a spike in customer additions and transaction size, posting a lower-than-expected net loss.

The company's current-quarter revenue guidance also turned out to be better than expected, allaying investors' worries regarding potential market-share concession to the likes of Hewlett-Packard Enterprise and Cisco. So what led to Nutanix's terrific growth last quarter, and is it capable of sustaining its momentum? To find out, let's take a look at three key points from Nutanix management.

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1. More customers are making repeat purchases

Nutanix added 875 new customers during the fourth quarter of fiscal 2017, ending the year with 7,051 clients, up from 3,768 customers at the end of the prior year. That's an 87% increase. What's important to note is that the company is getting more and more repeat orders from its existing clients.

In fact, 70% of Nutanix's bookings last quarter were from existing customers as compared to 64% in the year-ago quarter. And the company has been focusing on larger deals. For instance, a quarter of Nutanix's billings in the fourth quarter came from its top 25 customers, with the number of $1 million-plus deals increasing 39% year over year.

Additionally, there are over 166 customers who have made purchases of more than $2 million from Nutanix.

This is good news for Nutanix investors as higher repeat orders reduce the amount spent by the company on customer acquisition. This was clearly evident last quarter as it spent 58.6% of its revenue on sales and marketing, down from 62.9% in the year-ago quarter.

Looking ahead, Nutanix believes that it can get more business from its large clients. CEO Dheeraj Pandey said, "... we feel very good about our large customers becoming even larger, and many of them are now interested in software agreements with us in fiscal 2018."

2. Nutanix is pushing software sales

Nutanix's software-related bookings jumped 96% year over year last quarter. The company generated 17% of its $289.2 million worth of bookings from the software side of the business. The growth in this segment has allowed Nutanix to make up for the margin erosion that it has witnessed due to an increase in DRAM prices.

Nutanix anticipates its gross margin to remain flat this quarter despite a 10% projected increase in DRAM costs, thanks to a higher mix of software sales. The company believes that its recently launched multi-cloud management software -- Nutanix Calm -- will play a key role in pushing stronger sales.

Nutanix Calm targets the hyper-converged cloud environment where enterprises can run applications on both public and private cloud infrastructures. The platform will allow enterprise customers to separate cloud application management from the related infrastructure, enabling hyper-convergence.

The company has already made some progress in this space by partnering with the Google Cloud Platform, allowing users to manage applications in a hyper-converged environment. This could be a big deal for Nutanix as the hyper-converged cloud infrastructure market could be worth an estimated $8.5 billion in 2020.

3. DRAM pricing is a concern

Nutanix's focus on increasing software sales and getting more business from existing customers should ideally have a positive impact on its margins, but this hasn't been the case so far due to higher DRAM prices. In fact, the company's gross margin fell 300 basis points year over year in the fourth quarter to 58.3%.

In all, Nutanix's gross margin was impacted by 600 basis points in fiscal year 2017 because of higher DRAM pricing. But the company has now decided to lock in DRAM prices, so it believes that it can hold its gross margin steady at 58% in the new fiscal year.

While Nutanix management is witnessing a slowdown in the growth rate of DRAM prices, it might not get quick relief on this front as DRAM supply is still constrained.

However, research firm Gartner believes that DRAM pricing will plummet in 2019, as increased demand will force suppliers to increase capacity. Nutanix will have to execute impressive cost management until then to ward off the negative implications of higher pricing.

Final thoughts

Nutanix has a lot going for it right now as it is pulling the right strings to take advantage of the potential growth in the hyper-converged cloud market. Of course, there is a headwind in the form of higher DRAM prices, but investors should be pleased with the company's strategy of pushing high-margin sales as it should help it counter that weakness and position itself for long-term growth.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gartner. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.